Facebook spooked investors yesterday when it announced earnings. Actually, profit levels themselves were not the problem. Facebook reported robust financial results. However, management informed investors that the number of teens visiting the site declined in this recent quarter. What's happening? I believe that teens are migrating to other social media sites, one of which Facebook now owns (Instagram). I hear many parents of middle school and high school students noting that their kids are not asking first to join Facebook. Instead, they are first asking to join Instagram or some other social media sites.

Here's the potential bigger problem coming down the road for Facebook. When you are growing as a social media site, you have network effects in your favor. The more users on the site, the more value per each user - it's a virtuous cycle. However, when the number of users begins to decline, you have the potential for a downward spiral to begin. As someone's friends leave Facebook (or don't join in the first place), he or she derives less value from the platform. Then that person defects perhaps. Their friends now derive even less value from the site, and they may defect. We've seen this story before, of course... just ask the folks at MySpace. Now, I'm not predicting such a dramatic fall for Facebook, but I am suggesting that investors have a right to be worried about the drop in teen usage. It will be an interesting metric to watch going forward.

Wednesday, October 30, 2013

Here's a great video for those embarking on a transition in their career (graduating from college, changing jobs, switching careers, etc.). The video features Wharton Professor G. Richard Shell discussing his new book, Springboard: Launching Your Personal Search for Success.

Tuesday, October 29, 2013

Sears has been on a slow slide to extinction for some years, even decades. Now we hear that Sears is considering the sale of its Lands' End business unit. Well, it's about time. Whenever we look at a corporate strategy, we have to ask the following question about each business unit: Is it truly better off as part of this corporation, as opposed to being on its own or part of some other organizational arrangement? In this case, you have to ask: Does Lands' End benefit from being part of Sears? Is it perhaps disadvantaged because it is part of a struggling retailer? This article in Business Week makes a good case for why Sears should divest Lands' End. Several good arguments can be made. First, Lands' End could benefit from being a smaller, focused company with all attention focused on growing its online business (it already has a strong catalog business and a decent presence online). Second, it would not be battling for capital within a larger corporation that has liquidity issues and clear capital constraints. Third, the company may be able to attract more talent as a focused entity, as opposed to being part of a struggling giant such as Sears. Does a young talented fashion merchandiser want to work for Sears? Might they work for a Lands' End brand that is owned by a private equity firm instead? Finally, Lands' End may actually be harmed because, as the article suggests, "Being close to Diehard batteries or Kenmore dryers doesn’t do much for an apparel line looking to burnish its fashion cred."

The researchers find that the level of innovation is highest among
privately held start-ups and lowest in businesses that go public, while
acquired companies fall somewhere in between. Hsu and Aggarwal
discovered that pivotal to this ordering of innovation outcomes is the
level of public scrutiny the company gets rather than the degree to
which key players are leaving the company.

The scholars find that investors and Wall Street analysts focus a great deal of attention on short term performance. As a result, many startups sacrifice the types of long run investments required to drive innovation, so as to maximize short run performance. Moreover, being a public company makes it more difficult to experiment. The markets tend to not be kind to failed experiments. Of course, experimentation is a key innovation tool for startups. For more on this research, click here.

Thursday, October 24, 2013

Malcolm Gladwell has written an entertaining and insightful new book titled David and Goliath. The book examines how the disadvantaged may not be as disadvantaged as we think in some cases. I found the book very interesting, though I acknowledge the merits of some heated criticism that the book has received. Scholars take issue with the way Gladwell chooses selectively from the academic literature to support his points, without always examining the entire range of studies on a topic. Still, he raises some great points. His chapter on why smaller class sizes don't necessarily raise academic performance is a tour de force. I'm sure he won't be getting invited to as many cocktail parties in Manhattan after some people read that chapter!

I would like to focus in for a moment on how a key theme from the book connects with some foundational scholarship in the field of business strategy. Harvard Professors David Yoffie, Jan Rivkin, and Michael Porter have argued for years that successful entrants often take advantage of the rigidities associated with the historical commitments that incumbent players have made. Yoffie specifically points out that some great entrants practice "judo strategy" - using the incumbent's apparent strengths against them. In many ways, that is the story of David and Goliath, and a key theme throughout the book by Gladwell. In short, Gladwell's notions about the disadvantaged apply in the business world as well.

Wednesday, October 23, 2013

Does team chemistry lead to winning, or does winning lead to good chemistry? I've heard that question debated frequently as my beloved Red Sox unexpectedly head to the World Series tonight. I think the question is misleading though. What puzzle are people trying to solve when posing this question? They are observing unexpected success. They see a team that is clearly more than the sum of its parts. That's the riddle here. Chemistry is a simplistic answer, though, for why the whole is worth more than the sum of the parts.

Team synergy results from a combination of factors, not simply from the fact that players get along with one another (who can forget the 25 players, 25 cabs era of 20 years ago with the Clemens Red Sox?!?). Synergy derives from good team design. That means selecting complementary parts, not simply assembling all-stars based on statistical models (sorry, Theo). It also means thinking about who your team leaders will be, and how they will lead through both words and actions. Finally, it means not overreacting to a small sample of poor performance. The Sox didn't let one bad year cause them to forget the longer term pattern of strong performance for players such as Lester and Buchholz.

Synergy also involves creating the right environment in which people are motivated to excel. John Farrell has created an environment of collective accountability. He's also been transparent, communicating his decisions and rationale to players clearly and firmly.

What about the beards? Well, they are fun. They are a wonderful bonding experience. In the end, though, the team design and environment matter most.

Monday, October 21, 2013

IDEO's David and Tom Kelley have featured an interesting concept called the failure resume in their new book, Creative Confidence. The idea comes from Stanford professor and creativity expert Tina Seelig. The Kelley brothers describe one famous example of a failure resume - the "anti-portfolio" of the highly successful venture capital firm, Bessemer Venture Partners. Here's an excerpt, reprinted by Fast Company:

Nonetheless, one of our favorite examples of a company owning their
failures comes from financial services. Bessemer Venture Partners is a
well-respected, 100-year-old venture capital firm that has gotten in on
the ground floor of some stellar-growth companies. Their website
predictably features their “Top Exits.” What’s refreshing and not so
predictable is that one click away from these mega-successes is a
catalog of miscues and failed foresight Bessemer calls their
“Anti-Portfolio.” As Bessemer explains, their “long and storied history
has afforded our firm an unparalleled number of opportunities to
completely screw up.” One of their partners passed over a chance to
invest in the Series A round of PayPal, which sold a few years later for
$1.5 billion. The firm also passed--seven times--on the chance to
invest in FedEx, currently worth over $30 billion.

Why would people want to keep a failure resume? The Kelleys, as well as Professor Seelig, argue that we need to "own" our mistakes if we are to improve and move forward effectively. Acknowledging mistakes is a crucial first step in the learning process. Moreover, I would argue that being able to compare those failures the successes on our actual resume is a crucial way that we can identify the drivers of high vs. low performance. The failure resume also humbles us a bit, and it reminds us of the role that good fortune played in some of our successes, and bad fortune in some of of our failures.

Thursday, October 17, 2013

One of my clients has just completed a new three-day leadership development program for senior folks in the organization. The managers came from different divisions and didn't work together often. What was different about this program? It involved no lectures or case studies about other firms led by professors, and it involved no presentations from top executives. What did they do? The program began with a four-hour simulation focused on teamwork and decision making. The entire second day involved group work trying to come up with solutions to challenges described in a special case study about their company written especially for this program. The challenges addressed building new business models. At the end of that day, the groups presented to the CEO and her team. The program ended with a session in which the teams came together to collaborate and build upon each other's work. What was the reaction? One participant noted that he or she learned a ton even though they never felt like they were being taught. Isn't that amazing? That's true learning by doing. More leadership programs need to involve this type of "real work" that brings people together in ways that they don't normally collaborate. We need to create forums for collaboration, and we need to truly foster learning from one another.

Jennifer Cohen has a very useful article at Forbes.com today. She writes about the five things that highly successful people tend to do before eight o'clock in the morning. In particular, I think #5 is worth considering for a moment:

Make Your Day Top Heavy. We all have that one item on
our to do list that we dread. It looms over you all day (or week) until
you finally suck it up and do it after much procrastination. Here’s an
easy tip to save yourself the stress – do that least desirable task on
your list first. Instead of anticipating the unpleasantness of it from
first coffee through your lunch break, get it out of the way. The
morning is the time when you are (generally) more well rested and your
energy level is up. Therefore, you are more well equipped to handle more
difficult projects. And look at it this way, your day will get
progressively easier, not the other way around. By the time
your work day is ending, you’re winding down with easier to dos and
heading into your free time more relaxed. Success!

Is this suggestion worth following? In some cases, I think it makes a good deal of sense. However, I would note that, in some cases, we need a few "small wins" before we tackle something very unpleasant and/or challenging. We build confidence and momentum by securing some easy victories before we try to climb to the mountaintop. As is the case with so many things in life, it simply depends. Making your day top heavy every day does not seem like the right way to go. However, this strategy may fit perfectly in certain situations.

Friday, October 11, 2013

Here's a brief follow-up to my recent post about how to offer negative feedback... Adam Bryant recently interviewed Jonathan Klein, CEO of Getty Images, for his excellent Corner Office column in the New York Times. Klein explains how he learned to pause before offering negative feedback. Here's an except from the interview:

I’ve learned a lot from my executive coach. Anytime
someone came to me to show me their work, I would critique it. I would
almost behave like a schoolteacher — my mother was a teacher — and bring
out the metaphorical red pen. And what I didn’t appreciate at the time
is that before you mess around the edges, you’ve got to say to yourself,
“Am I going to make this significantly better, or am I going to make it
only 5 or 10 percent better?” Because in fiddling over the small stuff,
you take away all the empowerment. Basically it no longer becomes that
person’s work. And after a while, those people get into the habit of
giving you incomplete work, and then you have to do it for them.

I also used to always debate and argue whatever point was under
discussion. And my coach said: “You’ve got to stop. You’ve got to pause,
and think, ‘Are you debating the point to get a better outcome or
because you just like getting the last word and you like winning?’ If
you’re debating to get a better outcome, absolutely do it. If you’re
debating because of the latter, cut it out.”

I would add one other question that you should ask yourself in these situations. When someone comes to me, am I truly listening to them? Or, am I already preparing my rebuttal before they have completed their thought? In many cases, we prepare our critique before the idea has been communicated fully. Active listening not only shows respect to the other party, but it helps us understand their rationale more effectively.

Thursday, October 10, 2013

Activist investor Barington Capital is pushing for the breakup of Darden Restaurants, according to today's Wall Street Journal. Darden operates the following restaurant chains: Red Lobster, Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V's, and Yard House. The newspaper reports that, "The investor group argues that Darden should create one company with its
Olive Garden and Red Lobster restaurants, and another with its
higher-growth chains, which include Capital Grille."

One could argue for a breakup of the firm, but this particular rationale does not make sense. Why should Darden own multiple restaurant chains? Presumably, they believe that significant economies of scope (i.e. synergies) exist among the chains. If you believe that the company should be broken up, then you must believe that these synergies are relatively small.

The article suggests, though, that the activist investor wants to split the high growth businesses from the low growth ones. Why will this increase shareholder value? Do they think that the P/E ratio of the firm is too low because it's being dragged down by the lower growth businesses in the portfolio. If so, that's faulty logic. The investors can see that some chains are higher growth than others, and they understand how to value the parts. You can't create a pop in valuation just by putting the high growth chains in a different firm and looking for a high P/E ratio. Why? Well, investors will offset that high P/E with a very low one in the firm that remains holding the low growth businesses. You have not magically created value just by segregating units with different expectations of future growth. The only reason why it could make sense would be if you believed that the higher growth businesses somehow are fundamentally different, and that they share synergies with each other, but not with the lower growth units. I don't see how that is the case, but that would have to be the rationale to pursue this particular breakup strategy.

Wednesday, October 09, 2013

Geoffrey Tumlin has a very useful article at Fast Company on the art of giving negative feedback. Here are several of his key tips:

Offer an example! Don't just tell someone that they have a generic problem (you have poor presentation skills). Give them a concrete example (talk about the meeting last week where they did not pace their presentation well and ran out of time before conveying crucial information).

Focus on a problem that the other party can fix. As Tumlin says, "If you tell Jim that he’s a bad presenter (a criticism), how does he
fix that? But if you tell him he had too many slides during yesterday’s
client pitch (feedback), you’ve pointed out something that he can fix.

Be concise. In many instances, we don't extract ourselves from the conversation. Out of our discomfort, we keep the dialogue going, even after we have conveyed our key point. Tumlin explains, "Length doesn’t correlate to success when it comes to delivering negative
feedback; long conversations confuse as often as they clarify. Your
goal is to communicate the negative feedback, not to produce a dazzling
epiphany, a heartfelt apology, or a ton of emotive dialogue. Once you’ve
communicated your message, get out of the conversation, and allow time
and space for the feedback to work."

I would add one other tip to this terrific set of recommendations. If possible, offer examples of how others overcame a similar problem. For instance, if a student is struggling with their job search, I may notice that they are stumbling on a particular aspect of that search (e.g. interview skills). If I can offer them an example (disguised perhaps) of another student who overcome this particular challenge, that can be helpful. It conveys a path to improvement, and it gives them confidence that they too can fix this problem.

Eliane Bacha and Sandra Walker have published a new article in the Journal of Business Ethics. The paper examines the relationship between perceptions of fairness and transformational leadership. The scholars studied 100 European companies. They found a relationship between certain types of fairness and the ability to inspire change. In this article in The Guardian, Polly Courtice, director of the
Cambridge Programme for Sustainable Leadership (CPSL), explains why perceptions of fairness matter: "Fairness reflects an assumption about fundamental equality… about
not putting your rank in front of other people's interests." Co-author of the article Sandra Walker notes, "What they [employees] care about is whether they are active in
decision-making and how they are treated by their boss."
Fairness does not mean that everyone gets treated identically, of course. There is a significant difference between outcome fairness and procedural fairness. Leaders can't always make it such that all outcomes are equal or fair. However, they can make the process of decision-making more fair. They can invite input, demonstrate strong consideration of others' views, give others an opportunity to influence the final decision, and lead a transparent decision process. If they create procedural fairness, then they can build commitment and buy-in even if all parties do not agree with the final decision.

Saturday, October 05, 2013

On our Bryant University Honors Program trip to Washington, DC this week, we went to a Capitol Steps show. For those not familiar with the Capitol Steps, they put on a terrific political satire comedy show. It seemed very appropriate to hear from the Capitol Steps this week with all that is occurring in Washington. Here's a brief look at one of their hilarious routines:

You've all seen plenty of promotions that offer two or more products for one bundled price. Think of a combo meal at McDonald's, an offer for an airline ticket and hotel reservation, or a special for a blazer and pair of slacks. Does offering these bundles make sense? New research by Aaron Brough and Alexander Chernev suggests that companies should proceed with caution. Chernev explains that, " When we show people a burger and ask them how many calories it
has, they might say 500. For a side salad, they might say 100. But if
you pair the same burger with the side salad, people will often think
that the whole meal has fewer calories—say 400—than the burger alone.
That seems counterintuitive, as if the salad somehow has ‘negative’
calories.” The scholars document a similar effect on consumer willingness to pay. They conducted experiments in which they paired expensive items with an inexpensive item in a bundle (example: a home gym and a fitness DVD). They found that bundling decreased customers’ willingness to pay substantially. In fact, consumers sometimes end up valuing the bundle less than the expensive item on its own!

Thursday, October 03, 2013

IBM serves as a rare example of a very large organization that went through a near-death experience and came back to become one of the most successful and admired companies in the world. If you look at the top 10 most admired companies on Fortune's original list in 1983 and compare it to today's list 30 years later, only 1 company is in the top 10 in both years - IBM. In the middle years, of course, the company nearly did not survive. Lou Gerstner led a remarkable transformation during the 1990s.

What accounts for IBM's remarkable sustained success over many decades? One answer may be found in a quote from CEO Ginny Rometty in the current issue of Fortune magazine. She says, "To be 100 years old, you can never define yourself by a product." What an astute observation. Too many firms become defined by a particular product that becomes very popular and profitable. Then, as the world changes, they can't adapt and newer, better products pass them by. In IBM's case, they have not let a particular product become paramount. They have been able to move beyond one generation of technology and embrace a new wave, and they have done that multiple times. It's rare. One wonders whether that "defined by a particular product" phenomenon serves as an explanation for the struggles of firms such as Blackberry.

Wednesday, October 02, 2013

When the auto industry bailouts occurred, we heard much talk about the need for the automakers to shift their focus toward smaller, more environmentally friendly vehicles. We heard that a focus on trucks and SUVs was the reason for the collapse. Well, where do things stand now in 2013? Ford and GM just reported September sales. Pick-up trucks accounted for 29% of their total vehicle sales in the past month (that does not include SUVs). The chart below, from Bespoke Investment Group, shows Ford pick-up truck sales reaching pre-recession levels:

In the end, companies produce what consumers demand. The evidence suggests that consumers in the US still like their trucks. Will things change if gas prices spike once again? Surely, they will. How are Ford and GM positioned to respond to such a future shock? It appears Ford is in a better position, even though it actually has the leading market share in pick-up trucks. Ford has higher margins in the US, and thus, more room for error. Moreover, it has several well-regarded passenger vehicles that offer strong gas mileage. Time will tell, but the story here certainly reinforces the notion that, in the end, the customer is boss. Companies deliver what customers want, and like it or not, many American consumers still want their trucks.

Tuesday, October 01, 2013

Conventional wisdom holds that consumers are often "duped" into paying exorbitant prices for luxury goods that serve as status symbols. Is that true? Are we paying a significant premium for status? HBS Professor Daniel Matter has been studying this question for some time. He argues, "We like to believe that people pay for status for purely symbolic
reasons, but the empirical evidence for that has been weak at best." He explains, "To get at the symbolic value of status, we have
to find evidence that buyers are willing to place a premium on status,
holding constant quality and the reputation for quality... Look around and
you may be hard-pressed to find a high-status producer that consistently
produces second-grade products or a low-status producer that
consistently produces first-grade products." Matter's research suggests that the conventional wisdom may not be true. Consumers aren't being duped after all. They aren't paying for status over substance, in most cases. It's an interesting perspective. For more, check out this article on the HBS Working Knowledge site.

Michael Roberto

The Great Courses

About Me

I am the Trustee Professor of Management at Bryant University in Smithfield, RI. I joined the faculty after serving for six years on the faculty at Harvard Business School.

My research, teaching, and consulting focuses on leadership, with a particular emphasis on decision-making and teams. I have published two books based upon my research: Why Great Leaders Don't Take Yes For An Answer (2nd edition to be released in May 2013), and Know What You Don't Know (2009).